Morning Report: Fiscal stimulus on the way

Vital Statistics:

 

Last Change
S&P futures 2422 -19.4
Oil (WTI) 23.61 -0.49
10 year government bond yield 0.85%
30 year fixed rate mortgage 3.44%

 

Stocks are lower this morning despite a deal on the fiscal stimulus bill. Bonds and MBS are up. The Fed will be continuing its normal $50 billion in MBS purchses this morning.

 

Congress came to a deal on a stimulus bill which aims to ease as much of the economic shock from Coronavirus as it can. Most Americans will get a $1,200 check, small businesses will get $367 billion in relief and state / local governments will get $500 billion in loans. Unemployed workers will get an additional $600 a week up to 4 months.

 

Trump says that he wants the “country opened” by Easter in order to salvage the US economy. The idea would be to re-open restaurants and in-person employment in the non-hotspots. Needless to say, health experts are aghast at the idea, and yes, health concerns are a concern. They aren’t the only concern. Of course state governments are going to have the last word on that as well.

 

A consortium of originators, credit agencies and lobbyists sent a letter to the government discussing relief for homeowners affected by Coronavirus. The idea would be to allow people affected by the crisis to defer mortgage payments for 90 days without interest or penalties. The missed payments would essentially be added to the final payments of the mortgage without interest. Of course servicers are on the hook for the advances, and non-bank servicers don’t have the liquidity to make these advances. The group urges the government to provide some sort of borrowing facility for non-bank servicers to draw upon to make the these additional payments.

 

The Coronavirus has impacted commercial mortgage backed securities as well. As businesses shut down, they can’t make their mortgage payments. This means that the mortgages securing the complex are having issues. Lots of small business owners are combing over the force majure clauses in their contracts right now. For mortgage bankers, this is an issue because the same folks that buy CMBS often buy RMBS. To make matters worse, some of the biggest buyers of mortgage backed are sovereign wealth funds, and with less goods coming from overseas, the less demand for MBS from foreign funds. The Fed will purchase agency CMBS with the help of Blackrock.

 

Mortgage Applications fell 29% last week as rate spiked and bottlenecks in the mortgage market increased. “The 30-year fixed mortgage rate reached its highest level since mid-January last week, even as Treasury yields remained at relatively low levels. Several factors pushed rates higher, including increased secondary market volatility, lenders grappling with capacity issues and backlogs in their pipelines, and remote work staffing challenges,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “With these higher rates, refinance activity fell 34 percent, and both the conventional and government indices dropped to their lowest level in a month. Looking ahead, this week’s additional actions taken by the Federal Reserve to restore liquidity and stabilize the mortgage-backed securities market could put downward pressure on mortgage rates, allowing more homeowners the opportunity to refinance.”

 

Have been hearing that Fannie cash window pricing was 50 – 200 basis points wider yesterday. FHA rates have been getting smashed on the basically worthless servicing value. Every co-issue partner is on hiatus. Tough to manage a pipeline when the bids for your loans are lower and the NY Fed is pushing your hedge inexorably higher which is driving margin calls. I keep saying the mortgage banking business will feast once this is over, but we gotta get to the table first.

Morning Report: Fannie Mae relaxes some requirements

Vital Statistics:

 

Last Change
S&P futures 2328 104.4
Oil (WTI) 24.21 0.89
10 year government bond yield 0.85%
30 year fixed rate mortgage 3.84%

 

Stocks are higher this morning as the markets digest the actions by the Fed to stabilize markets. Bonds and MBS are up.

 

The actions from the Fed seemed to stabilize things yesterday. Lenders said that aggregators were bidding on tapes, although turn times were on the slow side. We did see some decent lock volume yesterday afternoon, so (fingers crossed) things are returning to normal for at least straightforward Fannie Mae loans.

 

Yesterday, Fannie Mae outlined some flexibility with employment verifications and appraisals. Fannie will now accept written verification of employment or bank statement confirmation. On appraisals, alternatives are permitted under certain circumstances, such as primary purchases, when the Fannie holds the previous mortgage.

 

With the Fed’s interventions in the TBA market, more bankers are getting margin calls. The fun never ends. The mortgage REIT sector has been wallopped and it looks like at least one (Invesco Mortgage) can’t make its margin calls.

 

Seeing announcements from Pingora and Mr. Cooper suspending MSR co-issuance  in the Ginnie Mae space. Can’t imagine where GN servicing is trading these days but it is probably awful.

 

The non-QM market is pretty much halted as Angel Oak and Citadel suspended non-QM lending for at least two weeks. The securitization markets are frozen at the moment so these firms don’t have much of an outlet. Citadel said that it has no liquidity issues at the moment and that its balance sheet is strong.

 

The Senate failed to pass a stimulus bill yesterday. Democrats think the bill is too “corporation centric” as opposed to “worker centric.” Of course if the employers are out of business, the workers are going to take a hit too.

 

Liquidity is drying up in the Treasury market.

Morning Report: The Fed announces further stimulus measures

Vital Statistics:

 

Last Change
S&P futures 2323 34.4
Oil (WTI) 22.71 0.09
10 year government bond yield 0.76%
30 year fixed rate mortgage 3.84%

 

Stocks are higher after the Fed announced additional support measures for the markets. Bonds and MBS are up as well.

 

The NY Fed announced further measures to support the markets this morning.  Essentially, the Fed will do whatever it takes to keep the financial market working properly.

Effective March 23, 2020, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to increase the System Open Market Account (SOMA) holdings of Treasury securities and agency mortgage-backed securities (MBS) in the amounts needed to support the smooth functioning of markets for Treasury securities and agency MBS.  The FOMC also directed the Desk to purchase agency commercial mortgage-backed securities (CMBS).

The Fed expects to buy $75 billion of Treasuries and $50 billion of MBS every day this week. As of right now (pre-open), TBAs are up, but bid ask spreads are wide.

 

The chart below (courtesy of Reuters) shows MBS spreads, which is the difference between the yield on the current coupon mortgage backed security and the comparable duration Treasury.  This represents the market’s reluctance to bid MBS and that flows through to rate sheets. Yes, the Treasury market yields are lower than February. Yes, the Fed Funds rate is lower than February. No, mortgage rates are not. Once those green bars get back to where they were in February we will be seeing lousy pricing in the primary market. The Fed’s $250 billion purchasing activity in the MBS market should help though.

MBS spreads

The Fed is also extending credit to other parts of the economy, specifically the muni market and the corporate credit market. The Fed will start purchasing investment grade corporate loans, it will re-launch the Term Asset-Backed Lending Facility which lent money to investors who buy credit card receivables and other consumer debt. The Fed also plans to roll out a Main Street Business Lending Program which will lend to small businesses.

 

Late last week, pretty much everyone stopped buying non-QM loans, and it looks like jumbos will end soon as well. The securitization markets are halted. I have heard that some non-QM lenders are even refusing to honor locks they have already extended. Aggregators were also declining to buy MBS with rates below 3% as well.

 

Lenders are still waiting for guidance out of Fannie Mae regarding verbal verifications of employment and drive-by appraisals. So far, people have been closing loans in parking lots, but loans are getting done. The last thing Fannie needs is for the mortgage finance pipeline to stop, so I assume they’ll find a way to make things work. The FHFA website apparently contains an announcement that it directs the GSEs to grant flexibility for appraisal and employment verification, so something should be forthcoming.

 

Washington is set to vote on a relief bill today at noon. The Democrats are complaining about executive compensation and stock buybacks, though the bill does contain some limitations on those. Treasury Secretary Steve Mnuchin said the bill could help the Fed direct $4 trillion to the business sector. Companies that take the money will be required to maintain payroll “to the extent practicable.” Supposedly the portion of the loan that goes to maintaining payroll could be forgiven.

 

Interesting data point: Lennar reported good first quarter earnings, which pretty much was expected. Pre-Coronavirus, homebuilding was set to have the best year in over a decade. Their quarter ends in February, and the company said that orders were up 16% in the first two weeks of this quarter – i.e. the first two weeks in March. In most of their markets construction continues, and with interest rates as low as they are PITI payments are lower than market rents.

 

The deadline for filing taxes has been extended to July 15.

 

Existing Home Sales increased 6.5% in February, according to NAR. “February’s sales of over 5 million homes were the strongest since February 2007,” said Lawrence Yun, NAR’s chief economist. “I would attribute that to the incredibly low mortgage rates and the steady release of a sizable pent-up housing demand that was built over recent years.” Social distancing and economic uncertainty is expected to weigh on sales going forward, but the fundamentals of the housing market remain strong, with tremendous pent-up demand.

Morning Report: Chaos in the TBA market

Vital Statistics:

 

Last Change
S&P futures 2411 22.4
Oil (WTI) 24.61 2.39
10 year government bond yield 1.01%
30 year fixed rate mortgage 3.84%

 

Stocks are higher this morning on overseas strength. Bonds are up, while MBS are down.

 

The MBS market has decoupled from the Treasury market, with weakness across the coupons. It got so bad yesterday that bid/ask spreads widened to about a point and some coupons in the Ginnie space simply stopped trading. Despite a rally in 1.5 point rally in the 10 year, 2.5% TBAs are down half a point. The Fed has taken notice and has directed even more QE money to the sector. They are expected to buy about $35 billion of MBSs today.

 

The issues in the TBA market are probably due to a few things: First mortgage backed security investors are probably deleveraging. The massive sell-off we saw in the mREIT sector on Wednesday (with some stocks down 50%+) was due to rumors that banks were pulling their repo lines. Also, with the trade deficit (probably) falling with China we are seeing less Chinese purchasing of mortgage backed securities. This is affecting pricing as well.

 

Fannie Mae’s window pricing took a turn for the worse yesterday as well. Perhaps they are simply full, but take a look at the worse. We are back to mid-January levels. In other words, all the improvement from the emergency rate cuts are gone. Chart courtesy of Optimal Blue.

 

mortgage pricing

 

Warehouse banks are beginning to demand huge haircuts on jumbo loans and are rejecting non-QM loans. So forget about those for a while.

 

European banks are struggling right now, and the fear is that it will spread to the US banks. Deutsche Bank has always been a problem child, and I don’t even want to get started on what the markets think of Italian banks Unicredito and Intesa SanPaolo Imi. This is going to affect US banks and reduce a lot of the risk tolerance in the system.

 

Home buyers need to bake in more time to close. Meanwhile the industry waits for guidance regarding verbal verifications of employment, and hopes that drive-by appraisals will become acceptable.

 

Morning Report: Spring Selling Season takes a breather

Vital Statistics:

 

Last Change
S&P futures 2359 -52.4
Oil (WTI) 21.91 2.39
10 year government bond yield 1.14%
30 year fixed rate mortgage 3.58%

 

Stocks are lower this morning as volatility continues. Bonds and MBS are down.

 

Late yesterday, the Fed announced measures to support short-term money market mutual funds. Global central banks have been cutting rates and conducting currency interventions.

 

Initial Jobless Claims came in at 288k last week, a big increase but hardly recessionary. The big tell will what happens next week, which will include people who were laid off this week.

 

The government has imposed a 60 day moratorium on foreclosures and evictions.

 

Redfin has suspended its iBuying program. This was the program where Redfin would buy homes directly from sellers and handle the sale. I have to imagine Zillow won’t be far behind. While the Fed is pulling out all the stops to keep the financial markets functioning, if lines of credit are at risk of getting pulled, this strategy absolutely does not work.

 

The NYSE has shut down floor operations and is going all electronic in response to the virus. To be honest, I am surprised at how well the stock market has functioned during this whole sell-off. I thought the algorithmic traders would disappear with this volatility. So far, so good.

 

The Spring Selling Season it taking a hiatus due to Coronavirus. After a 27% increase in traffic, it was flat over the past week. Redfin has canceled open houses, and at some point appraisals will become an issue if appraisers don’t want to go into homes.

 

Dismayed by the lack of inventory at your local supermarket? Don’t be.

 

Morning Report: Bonds down on Italian fears

Vital Statistics:

 

Last Change
S&P futures 2393 -92.4
Oil (WTI) 24.51 -2.39
10 year government bond yield 1.08%
30 year fixed rate mortgage 3.44%

 

Stocks are down big this morning as we continue the volatile markets. Bonds are getting slammed, where the US Treasury is following the carnage in Europe.

 

Volatility begets volatility, and that is what we are seeing. Oil is now at a 17 year low. The ironic thing is that gasoline prices will be ridiculously low for the summer driving season, but there will be nowhere to go. European bonds are selling off due to fears that the Italian economy is going to be so bad that they will need a bailout from Germany. The German Bund has picked up 50 basis points in yield, going from -78 basis points on Friday to -28 today. The US Treasury is being pulled along for the ride.

 

Washington is putting together a panoply of measures to try and support the economy while everyone hunkers down at home. It looks like the government is going to give everyone $1,000 in a couple of weeks to get people through this tough time. Multiple industries will probably get some sort of help, with hospitality and airlines at the front of the line. As oil falls, the frackers will be soon behind, and I suspect the mall REITs will be next. Companies are suspending stock buybacks left and right, which may explain some of the sogginess in the stock market.

 

Homebuilder sentiment fell in March to 72, which is still strong. I have heard that construction activity has been suspended in the Bay Area, and I saw that Loan Depot has ceased accepting loans from all of the counties surrounding San Francisco.

 

Housing starts came in at 1.6 million again in February. Building Permits were 1.45 million. February was probably too early to be affected by Coronavirus, so March will be a better tell.

 

Mortgage applications fell 8% last week as purchases fell 1% and refis fell 10%. Between margin calls and a lack of investor appetite for refis, mortgage rates backed up last week. Don’t forget that mortgage backed security investors detest volatility in the bond market. It makes hedging their portfolios more expensive, and the prepay option (which an MBS investor is short) more valuable.

 

Despite the moves by the Fed in the markets, the mortgage REITs continue to get slammed. I suspect this is a “shoot first, ask questions later” mentality on the part of investors, but some of these stocks are looking crazy cheap, trading at half of book value and some with dividend yields of 20% + (one of which declared its normal dividend yesterday) Watch the REITs, because their appetite for paper flows through to mortgage rates.

Morning Report: A view of things from the perspective of an investor

Vital Statistics:

 

Last Change
S&P futures 2427 22.4
Oil (WTI) 28.81 0.09
10 year government bond yield 0.8%
30 year fixed rate mortgage 3.48%

 

Stocks are up slightly after yesterday’s bloodbath. Bonds and MBS are down.

 

The actions taken by the Fed over the weekend seemed to help things in the mortgage market. According to Optimal Blue, the average 30 year fixed rate mortgage fell 23 basis points yesterday. Some of this was due to interest rate movements, but the biggest reason was a narrowing of MBS spreads.

 

Let me throw a little inside baseball stuff to explain what is going on. Mortgage backed securities are the basic input into rate sheets. They have an imputed yield and as of Friday, the difference between the imputed yield on the mortgage backed security and the corresponding Treasury was pushing 150 basis points. A month ago, it was around 100 basis points. The widening of MBS spreads (which translate into higher mortgage rates) was driven by a number of things, including prepayment fears, high refinance volumes, mortgage backed investors (think mortgage REITs) deleveraging, and a fear that repo rates will rise. The Fed’s actions over the weekend did two big things. The Fed’s commitment to provide liquidity to the markets soothed a lot of fears over repo lines getting pulled. The restarting of quantitative easing meant that one of the biggest players in the MBS market was back and went from being a net seller to a net buyer. That was just what the MBS market needed.

 

Annaly Capital (one of the biggest investors in mortgages) held a conference call yesterday to explain what is going on in the MBS market. Mortgage bankers should understand how the people on the “other side of the trade” – i.e. MBS buyers think. Here are my notes from the call yesterday

  • Fed much more accomodating with liquidity than it was in 2008.
  • MBS are the most attractive since before the financial crisis
  • Not seeing banks pull repo lines
  • Private label securitization markets will take a hiatus for a while
  • Repo haircuts remain unchanged.

The punch line is that the Fed is 110% committed to preventing a replay of 2008, where liquidity dried up and affected business. They do not want to see warehouse lines being pulled, repo lines being pulled, etc. Note the Fed committed to adding $500 billion in overnight repo financing as well.

 

Annaly investors were concerned that the upcoming year will be the biggest refinancing wave than 2003. For those that weren’t in the business then, 2003 origination volume was around $3.7 trillion. That is 75% higher than last year. The industry is about to be inundated with files, once the Coronavirus issue passes.

 

If the private label securitization markets go on hiatus, don’t be surprised to see the non-QM business slow down, and maybe mediocre pricing in the jumbo market. Simply put, the banks are being encouraged to keep businesses afloat and not just fill their balance sheet with portfolio products. Stock buybacks are also going to be suspended until this is over.

 

No, you can’t get that 0% mortgage rate you heard about on TV.

%d bloggers like this: